Business
Know the Business — Yatsen Holding Limited
Yatsen is a six-brand Chinese beauty house running an attention-arbitrage P&L: it earns 78% gross margins on lipstick and serum, then pays it back as 66% selling & marketing to keep the Tmall and Douyin algorithm pointing at its hero SKUs. The 2020–22 IPO-fuelled color cosmetics business has been quietly re-engineered into a skincare-led portfolio — skincare is now 53% of revenue vs 33% in 2022 — and the FY2025 results are the first credible evidence that the marketing-burn era is ending: revenue up 26.7%, GAAP operating loss collapsed from ¥825M to ¥186M, Q4 turned net-income positive. The market still prices YSG at the cheapest EV/Revenue in the listed beauty peer set (~0.2×, vs Mao Geping at 5.4× and ELF at 3.3×) because it has not yet seen a clean year of GAAP profit. The judgment call is whether the next two years deliver one.
Bottom line. Read Yatsen as a turnaround on operating leverage, not as a play on the Chinese beauty market growing faster. The 78% gross margin is the budget for marketing — value turns on whether the company can shrink the S&M line by 600–1,000 bps while skincare mix keeps pulling the gross margin up. A ¥1.05B cash pile plus a March-2026 US$120M convertible buy time, not the result.
1. How This Business Actually Works
Yatsen sells small physical objects — a ¥80 lipstick, a ¥260 mandelic-acid serum, a ¥980 Galénic vitamin C concentrate — at large multiples of manufacturing cost, then spends two-thirds of every yuan of revenue buying the attention needed to make them sell. Manufacturing is outsourced (Cosmax, Intercos, Kolmar, plus a 66,000-square-meter Yatsen-Cosmax joint manufacturing hub in Guangzhou that opened in 2023); R&D and brand IP are kept in-house. Roughly 85% of revenue flows through DTC online channels — Tmall, Douyin, RedNote, JD, the brand mini-programs and 77 offline experience stores — which lets Yatsen keep customer data and avoid retailer take-rates, but tethers the income statement to whatever platforms and KOLs charge for traffic this quarter.
The economic engine is a four-step loop: (i) acquire new customers expensively through livestream and KOL campaigns timed to the 6.18 and Double 11 promotional cycles; (ii) convert them onto hero SKUs (Perfect Diary Biolip lipstick, DR.WU mandelic-acid serum, Galénic No. 1 vitamin C concentrate, Eve Lom Cleanser) where pricing discipline holds margin; (iii) re-target them on the next launch via owned data and content; (iv) gradually shift the basket from cyclical mass color toward stickier higher-priced skincare so repeat rates rise and CAC amortises. Step (iv) is the entire turnaround thesis.
Takeaway: gross margin moved 460 bps in three years from product-mix shift and discount discipline, while the heavy lifting on operating margin came from goodwill — the FY2025 deleverage is almost entirely the absence of a ¥403M goodwill hit, plus a 600-bps drop in G&A. The S&M line, the actual swing factor for long-run value, has barely moved.
Where bargaining power sits. Yatsen is weak against its two large input markets — Tmall and Douyin set take-rates and ad inflation, and top livestream anchors capture 20%+ commissions during peak shopping festivals. Upstream it is closer to a price-maker: Cosmax-grade contract manufacturers compete for the JV business, and skincare ODM capacity is plentiful. Incremental margin gains therefore have to come from product mix (skincare up, color holding) and from discount discipline, not from squeezing suppliers.
Why incremental profit is non-linear. Because S&M is almost entirely variable, every revenue dollar at break-even S&M ratio drops directly to operating income. A 200 bps decline in S&M as percent of revenue on a ¥4.3B base adds roughly ¥85M to operating profit — the difference between a -2% non-GAAP margin and a +0% line. Q4 2025 was the first quarter where this arithmetic printed positive (¥3.0M net income, ¥41.2M non-GAAP). FY2026 will tell whether that was promo-cycle math or genuine operating leverage.
2. The Playing Field
Yatsen plays in two adjacent listed peer sets at once — the global beauty multinationals it competes with for the Chinese consumer (Estée Lauder, Shiseido, Coty), and the local Chinese beauty groups it competes with for the same Tmall and Douyin shelf-space (Mao Geping, Proya, Yunnan Botanée). Ignore the foreign multinationals' absolute scale and focus on the small-cap Chinese set, the right substitute set for a Chinese consumer's wallet.
Takeaway: Yatsen has the highest gross margin and the worst marketing intensity in the listed set. ELF (US) and Yunnan Botanée (China) are the right benchmarks for what "fixed" looks like: 70–75% gross margin with S&M held to 25–40% delivers double-digit operating margin and 3–5× EV/Revenue. Yatsen earns the gross margin already; the gap to "fixed" is entirely on the S&M line.
The peer set lines up on a clear regression: the heavier the marketing burden, the cheaper the EV/Revenue multiple. Yatsen is the furthest extreme on both axes. The interesting comparator is ELF — same archetype (mass, DTC, color-first), same gross margin band, but with marketing held to 25% of revenue and a 14% operating margin. The domestic comparator is Mao Geping — prestige color cosmetics, 84% gross margin, 35% S&M, 20% operating margin, 5.4× EV/Revenue. Both prove the Chinese beauty consumer will pay for a brand that can amortise its CAC; it is Yatsen's marketing intensity, not its addressable market, that depresses its multiple.
What "good" looks like in this industry: sub-40% selling & marketing ratio sustained across both 6.18 and Double 11, 70%+ gross margin, repeat rates in the 40–55% range, skincare revenue above 50% of total. Yatsen has the gross margin and the skincare mix; it does not yet have the S&M ratio or, by extension, the repeat rate that would justify multiple expansion.
3. Is This Business Cyclical?
Beauty demand is procyclical but more resilient than apparel — Chinese beauty retail grew 5.1% in 2025 and 8.2% in Q4 (NBS), modest by historical standards but still positive through a soft consumer backdrop. Where the cycle hits Yatsen is not the top-line of the category but the cost of buying attention inside it: when consumer confidence wobbles, brands ramp promotional intensity to fight for the same wallet, KOL slots get more expensive, and pricing discipline collapses across the peer set. Yatsen's own history shows two distinct cycle layers — a category cycle (2022 lockdowns, 2024 softness), and a brand-specific cycle tied to the maturation curve of Perfect Diary.
Where the cycle hits hardest. Color cosmetics is the canary: Q4 2025 color sales fell 9.1% YoY while skincare ran +51.9% in the same quarter. The consumer is trading down from mass color into both prestige color (Mao Geping) and clinical-credentialed skincare (DR.WU, Galénic). For Yatsen specifically this is fortunate: its acquired skincare brands are exactly where the money is moving. For its largest single brand, Perfect Diary, this is dangerous: the brand still contributes the majority of color revenue, and color revenue is still 47% of the group.
Working-capital and cash cyclicality. Promotional cycles drive bursts of inventory build (Q2/Q4 inventory days expand 30–50%), payable cycles to KOLs and platforms tighten in the same windows, and the cash conversion cycle stretches roughly one to two months at the peak. Yatsen has lived through one downturn as a public company (2022–24) and exited with ¥1.05B in cash plus a March-2026 US$120M convertible — workable, but the runway is finite if S&M intensity does not bend.
4. The Metrics That Actually Matter
The headline P/E and EV/EBITDA are useless here because the company is barely earning. The metrics that determine whether next year's GAAP operating line is positive or negative are the ones below — and there are only four that do real work.
The first two metrics — S&M ratio and skincare mix — explain roughly 80% of the variance in operating margin across the listed Chinese beauty peer set. They are the only two Yatsen management directly influences quarter-by-quarter. Watch them in lockstep: if skincare mix rises but S&M ratio does not fall, Yatsen is paying more to defend skincare than it once paid to defend Perfect Diary, and the thesis is mechanical not strategic.
Three of the four lines have moved meaningfully in the right direction since 2022: gross margin up 10.2 points, skincare mix up 19.5 points, net loss compressed from -22.2% to -2.2%. The fourth — the S&M ratio — is unchanged at 66%, despite Yatsen explicitly committing to deleverage it. That gap is the single missing data-point separating today's 0.2× EV/Revenue from peers clustering at 1.5–2×.
5. What Is This Business Worth?
Yatsen is not best valued as a sum-of-the-parts. The six brands are managed as one P&L with shared marketing, shared fulfilment, shared back-office and a single 1,049-person R&D centre — segment disclosure stops at "Color" and "Skincare" with no segment-level operating profit, and goodwill from the 2020–21 skincare deals has already been written down by ~80% (¥857M → ¥155M). Treat YSG as one operating engine whose value turns on whether the S&M-deleverage and skincare-mix thesis prints in the income statement in the next 6–8 quarters, with cash and brand-portfolio optionality as backstops.
The right lens is normalised operating earnings power, not current GAAP earnings (essentially zero) and not book value (¥3.0B equity dominated by ¥538M of intangibles and a ¥8.1B accumulated deficit). The underwriting question: at what scale of revenue and at what marketing intensity can this group sustainably print operating profit, and what multiple does the market then pay?
The simple arithmetic. At FY2025 revenue (¥4.30B) and a 60% S&M ratio (vs 66.3% today), operating profit would be ~¥85M instead of -¥186M. At FY2028 revenue closer to ¥6B and a 55% S&M ratio, operating profit would be roughly ¥300–400M. None of that is guaranteed; all of it depends on whether the S&M curve actually bends.
Why the market is paying so little. At an enterprise value of roughly ¥850M (~US$120M, market cap ¥1.88B less ¥1.05B net cash), YSG trades at ~0.20× FY2025 revenue. The market is pricing a single scenario: S&M intensity is structural, skincare mix-shift has plateaued at 53%, and the FY2025 operating-line recovery was promo-cycle math not durable leverage. If even one of those three propositions is wrong, the EV/Revenue multiple has room to converge with the peer set.
What would change the thesis. A sustained drop in the S&M ratio below 62% by FY2026 H2; skincare mix continuing past 55% with Galénic and DR.WU still compounding; one clean year of positive GAAP operating income; and the resolution of the March-2026 convertible at non-punitive terms. Conversely, a relapse in color cosmetics revenue combined with S&M ratio holding flat would confirm the bear case that this is a structurally unprofitable digital-native brand stuck behind a Chinese consumer that has moved past it.
Why SOTP doesn't help much here. The six brands are not separately economic in the data — they share marketing, share fulfilment, share back-office, and the only published segment is the binary Color vs Skincare split. Goodwill from the 2020–21 skincare deals (Galénic, DR.WU, Eve Lom) was originally ¥869M and has been impaired to ¥155M, so the market has already taken the view that the acquisition prices were too high. The portfolio has option value — Eve Lom or Galénic could be sold back to a global prestige group at a multiple of allocated revenue — but you cannot value it in a table because the brand-level economics aren't published. Treat the optionality as upside, not as base case.
6. What I'd Tell a Young Analyst
The single number to track: 66.3%. That is FY2025 selling & marketing as a percentage of revenue. Every quarter for the next two years, the first thing to check is whether this number is lower than it was a year ago. If it is, the turnaround is real. If it isn't, no amount of skincare mix-shift will pull the operating line positive.